Car Finance Explained

It isn’t always possible to buy a car outright and car finance can give you a manageable, affordable alternative. Indeed, almost nine out of ten cars in the UK are bought using vehicle finance according to the Finance and Leasing Association*

Car finance can seem like a minefield, but our guide should help you to find the right solution for you.

Personal or Business Contract Hire (PCH/BCH)

This is becoming an increasingly popular option for motorists, as fewer people are inclined to own their car.

A Personal or Business Contract Hire agreement is a fixed term contract with flexible initial payment options. At the end of the contract you simply hand the car back to the finance company.

The contract usually has a mileage limit and the charges for exceeding this can vary.

Example

Mercedes Benz A180 AMG Line 5 door

Personal Contract Hire, 2-year term

Rental Profile: 3+23

Monthly Rental: £330 per month (including VAT)

Initial Rental: £990.00 (including VAT)

(figures are for illustrative purposes only)

Pros

Fixed cost motoring – good for budgeting

Can include maintenance cover to avoid unexpected costs

No depreciating asset

No outright purchase costs

Flexible – you set initial and ongoing costs, duration and mileage terms

Cons

Vehicle must be returned in a very good condition – even minor damage can incur charges

High costs for early termination of the contract

You do not own the vehicle

High excess mileage charges

Potential high upfront costs

Personal Contract Purchase

Personal Contract Purchase (PCP) offers motorists a very flexible financing option, with the monthly payments based on 3 main factors:

Deposit: You can choose how much deposit you pay, if any.

Term: You can choose how long you want the agreement to last – this can be anywhere between 2 and 4 years.

Mileage: You set your anticipated mileage at the start of the agreement and this determines the optional final payment.

At the end of the finance term you can choose to pay a lump sum to keep the car, hand it back to the finance company with no further charges or you can part exchange the car and enter into another agreement.

Example

Mercedes Benz A180 AMG Line 5 door – price = £23,500

Personal Contract Purchase, 3-year term

Upfront deposit plus 36 monthly payments

Optional balloon payment £11,000

(figures are for illustrative purposes only)

Pros

Fixed monthly cost

Lower monthly cost than HP

Good flexibility if you want to hand the vehicle back or change it early

Cons

Vehicle must be returned in very good condition – charges will be high for any damage

High excess mileage charges

Large outlay to own the vehicle

Potential for negative Equity

Hire Purchase/Conditional Sale Agreement

The more traditional form of vehicle finance, and in many ways the most straightforward.

You pay each month and the vehicle is yours once you have paid the final instalment.

Pros

Spread the cost of buying your vehicle, knowing you’ll own it at the end

Fixed monthly cost

No large final bill

No mileage limits

Cons

Usually larger deposit than PCP

Could have higher monthly payments than PCP

Personal Loan

Unlike all of the other finance options a personal loan is not usually secured against the vehicle – so you own it from the beginning.